Several experts predicted that abandoning the Covid-zero policy would bring back consumption and foreign investment. They also hoped that factories would speed up production and that the instability in the property sector would be temporary.
However, this was not the case. Chinese consumers have retreated, and foreign companies have withdrawn their investment. Local producers are facing falling demand, local government finances are wobbling, and several major property developers have defaulted.
In July, China bucked the global trend and entered a period of deflation, from which it struggled to emerge in the second half of the year.
Prices in November fell 0.5 per cent year-on-year – the sharpest drop in three years.
China’s property crisis continued to worsen as more developers remained on the edge of default and home sales remained at half the levels of December 2020.
This drop is a serious problem for an economy where real estate accounts for around 30 per cent of gross domestic product (GDP) and almost 70 per cent of household wealth.
Although the International Monetary Fund (IMF) expects the Chinese economy to end the year with growth of 5.4 per cent, economists predict a slowdown in 2024 and beyond, due to structural problems such as record levels of debt and a low birth rate.
Property ruins
The recession in the property sector “is structural and likely to be permanent”, according to a report by the Conference Board’s China Business and Economics Centre.
In 2023, the main Chinese property developers defaulted or declared bankruptcy, and the authorities’ attempts to stabilise the sector have not had a significant impact.
“Chinese households have lost confidence in property as a channel for wealth accumulation. It is difficult to predict when the sector will stabilise, but when it does, it will not again be as important an engine of growth as it was in previous decades,” reads the report.
Carsten Holz, a specialist in Chinese economics at the Hong Kong University of Science and Technology, told Al Jazeera that the country’s political climate makes it difficult to clearly understand China’s economic problems. According to the economist, the often “almost anarchic environment of the past two decades” has led to features such as an over-indebted property sector, a partially insolvent wealth management system, murky local government finances, and commercial bank loan portfolios of “questionable quality”.
“No authority can understand the full extent of individual economic problems, let alone their interdependencies,” Holz pointed out.
For Louise Loo, an economist at Oxford Economics, the constant focus on financial stability means that the State Council will maintain an “aggressive tone” on local government finances throughout 2024, in an attempt to relieve the pressure of existing debt. In an opinion piece published in the China Daily, the economist believes that the acceleration of efforts to resolve local government debt issues will put the onus increasingly on the central government to use financing instruments. At the same time, top-down pressure to realize growth targets will “probably be less intense” by 2024.
A more disciplined approach to capital allocation will lead to only a small increase in the overall fiscal impulse, the economist points out, while inflation should see a timid rise as supply-side disinflationary pressures fade.
With regard to the situation in the property sector, Loo points out that the Chinese economy will have to undergo a “multi-year and rigorously managed clean-up process”.
“The old model of pre-sales for housing no longer exists. The transition to a new model that strengthens the role of state-run public and social housing could lead to greater consolidation among property developers in the country. There may be credit stress crises, but they are unlikely to be systemic,” he argues.
The Chinese government has emphasized a focus on increasing consumption and reducing economic dependence on the real estate sector, with Beijing directing banks to lend more to high-end manufacturing.
Debt to resolve
However, the long-term path to clearing the debt and restructuring the economy remains cloudy.
According to a report by the Brookings Institution, the Chinese economy is so dependent on real estate that if the sector shrank by just a third, around 10 per cent of Chinese production would have to be replaced by new industries.
“One area where you can see [Xi Jinping’s] hand in the economy is the focus on industrial policy and the vision that economic decision-makers have established that we don’t need real estate, and maybe even that we don’t need exports as much anymore,” Chris Beddor, deputy director of China research at Gavekal Research, told Reuters. “Those are the old engines of growth. Instead, the focus will be on finding new engines of growth, especially in technology.”
According to the Conference Board’s China Centre for Economics and Business, as China’s economy faces deep structural problems, any major reform or stimulus package could open the “door to catastrophe”.
“There is some scope for policies that stimulate credit growth and investment, but the larger intervention becomes, the more likely it is to trigger further economic inefficiencies and speculative investment,” the think-tank emphasized.
“Even so, in recent months the government has stepped up monetary and fiscal measures to stimulate ‘targeted’ investment, especially in infrastructure for flood recovery and disaster prevention. As a result, although the strong recovery peak seen in the third quarter of 2023 will dissipate, growth in 2024 should remain stable.”
